2024 Weekly Update

Market update

The S&P 500 closed the week at 5,464.62, +0.61% higher. The Dow Jones closed at 39,150.33, +1.45%, with the Nasdaq flat at 17,689.36. The volatility index VIX closed the week at 13.2 up from 12.66. The Euro Stoxx 600 rose +0.79%.

The 10-year UST closed at 4.26% up from 4.22% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -96bps. US Corporate Bond spreads: Investment Grade spreads widened 5bps at 164bps and High Yield widened 1bp at 342bps. German 10-year Bunds yield closed at +2.41% up from +2.36% a week before. In Europe, Corporate Investment Grade spreads widened 8bps at 133bps and High Yield widened 17bps at 356bps.

The US Dollar Index (DXY) appreciated +0.23% last week and closed at 105.80. The Euro closed at 1.0693 (-0.09%); the Yen depreciated -1.52%, closing at 159.80 and the Swiss Franc depreciated -0.36%, closing at 0.8939. Gold closed at $2,321.98 depreciating -0.47%. Oil was higher, Brent closed at $85.24 (+3.17%) and WTI at $80.73 (+4.07%).

Macroeconomy

US economy

Last week was punctuated by largely weaker US economic data. Retail sales came in slightly weaker than expected (+0.1% in May vs. +0.3% expected) with a two-tenths downward revision to the April numbers. Control group sales managed to recover after a decline last month but fell short of expectations (+0.4% vs. +0.5%). The weakness was concentrated in housing-related categories including furniture (-1.1%) and building materials/garden (-0.8%). Meanwhile, housing starts fell to an annualized rate of 1.277m in May, their lowest rate since June 2020. On the labor front, continuing jobless claims in the week ending June 15 stood at 238k, pushing the 4-week moving average to a 9-month high of 232.75k. Data released on Friday was stronger with manufacturing PMI for June climbing to 51.7 (up from 51.3 in May and ahead of expectations of 51). Services rose to 55.1, up from 54.8 the month before.

Fed speak

We heard from an array of Fed speakers. Patience was a common theme, with Richmond Fed President Barkin and Dallas Fed President Collins both watching data over the next “several months”. The recently appointed St Louis Fed President Musalem noted that conditions necessary for rate cuts “could take months, and more likely quarters to play out" but also talked about “potential early signs of continued progress on inflation” and added that the upcoming PCE “should show a welcome downshift of inflation in May”. Fed Governor Kugler had a rather dovish tone. She delivered a speech entitled “some reasons for optimism about inflation” and said “it will likely become appropriate to begin easing policy sometime later this year”.

Central banks

The Swiss National Bank decided to cut policy rates for the second time in a row (from 1.50% to 1.25%). The main justification for the rate cut was that “underlying inflationary pressure [had] decreased again compared with the preview quarter”. The SNB also lowered their inflation forecasts and expect it to fall from 1.3% in 2024, to 1.1% in 2025, and 1.0% in 2026. In the UK, May headline inflation reached the target of 2.0% y-o-y, down from 2.3% in April, helped by negative growth in energy prices. Core CPI eased by 0.4% from April, reaching 3.5% y-o-y. However, CPI services surprised to the upside, reaching 5.7% y-o-y, much higher than the BoE's initial forecast of 5.3%. On the back of this, the BoE decided to hold rates at 5.25% with a vote split of 7-2 (2 members voted for a 25bps rate cut). Although guidance was unchanged as monetary policy needs “to remain restrictive for sufficiently long to return inflation to the 2% target sustainably”, some of the language was dovish. Chances of a cut by the next meeting in August rose from 34% to 62% as a result. As expected by markets, the RBA (Reserve Bank of Australia) left their policy rate unchanged at 4.35%. The tone was rather hawkish as the central bank debated whether to hike rates given ongoing inflationary pressures linked to tight labor market conditions. Norway’s central bank also kept rates unchanged and stated rates would be kept at 4.5% until year-end. 

European PMIs

Europe’s flash PMIs for June came in weak and below expectations. Composite PMI fell to 50.8 (vs 52.5 expected), ending a run of 5 consecutive monthly gains. Manufacturing dropped to 45.6 (down from 47.3 in May) and services cooled to 52.6 (down from 53.2 in May). This represents the latest growth red flag for this market.

Government deficits in Europe

The European Commission announced plans to open an Excessive Deficit Procedure (EDP) after 7 countries were found to have breached deficit and debt ceiling rules. That group includes France and Italy which are running deficits expected to be at 5.3% and 4.4% respectively in 2024, above the 3% limit set out in the EU treaties. Although markets already knew about the deficit issue which was priced in, this comes at a crucial time for France where parliamentary elections are set to take place on June 30 and July 7. Although the outcome of the election remains uncertain, both leading candidates, the left-wing alliance and Marine Le Pen’s National Rally, have indicated that they would take a more assertive stance against the EU. This raises the risk of more clashes over the months ahead.

Japan inflation

In Japan, inflation ticked up in May, adding to hopes for rate hikes by the Bank of Japan. Consumer prices ex-fresh food rose +2.5% y-o-y, up from+2.2% in April. Headline inflation was also up, rising +2.8% y-o-y, from+2.5% the month before, partly due to higher energy bills. However, core-core CPI (ex-energy and fresh food), rose +2.1% y-o-y in May, down from +2.4% in April. Meanwhile, factory activity expanded for a second straight month in June although the pace of growth eased. The Au Jibun Bank flash manufacturing PMI came in at 50.1 in June, down from 50.4 in May. Services sector activity contracted for the first time in about two years amid subdued new business as the flash services PMI slipped to 49.8 in June from 53.8 the prior month. With the Japanese yen trading at its weakest level in two-months and near the lows again, expectations that authorities will intervene in the FX market are ramping up. Masato Kanda, the top currency diplomat, reiterated that the authorities are prepared to take necessary measures if there are any highly volatile moves in currency markets.

Highlights

On rates

In France, the left-wing alliance announced aggressive spending plans ahead of the first-round snap legislative elections on 30 June. This caused the 10yr Franco-German spread to widen +3.1bps to 80bps on Friday, its widest since 2012. European markets struggled against this backdrop, with sovereign bonds losing ground across the board. 10yr bund yields rose +4.9bps, despite a -2.3bps decline on Friday following the weaker PMI release. 10yr OAT (+8.3bps), BTP (+1.2bps) and gilt (+2.7bps) yields were also higher on the week. In the US, 10yr Treasury yields were up +3.5bps to 4.26%. Fed expectations held steady, with ~70% odds of a cut by the 9/18 meeting and 47bps worth of reductions priced in for the year.

What to watch

• Monday: Germany IFO (June)

• Tuesday: US Conf. Board Consumer Confidence (June)

• Wednesday: US New Home Sales (May)

• Thursday: US Q1 GDP, Personal Consumption (Q1), Core PCE (Q1), Jobless Claims, First Presidential Elections Debate; Eurozone Money Supply (May); Japan Retail Sales (May)

• Friday: US Un. Michigan Consumer Sentiment; Germany Unemployment Rate (June); France CPI (June); Italy CPI (June); UK GDP (Q1); Japan Jobless Rate (May), Tokyo CPI (June)